The Money View

The Clash of Economic Ideas: A Review

When Paul Krugman paints John Maynard Keynes as a pioneering critic of dominant free-market economics, he exaggerates wildly, both about the rigidity of orthodoxy and about the pioneering character of Keynes’ critique.  So says Larry White in his book The Clash of Economic Ideas and, speaking as a sometime historian of economic thought, I am inclined to agree.   It's less black and white than Krugman makes it out to be.

And yet, White organizes his own book along similar black and white lines as an account of Manichean struggle between advocates of capitalism versus socialism, free markets versus government planning, spontaneous order versus deliberate design, and the Mont Pelerin Society versus the Fabian Society.  It is a struggle epitomized by the clash between Hayek and Keynes, and readers learn quickly that White is always rooting for Hayek, and for Hayek’s adoptive ancestry Carl Menger and Adam Smith.  This is a book with a definite point of view.

Indeed, the best that can be said on the other side for Keynes is that he, along with his Fabian fellow-travelers, was an unwitting dupe of the real enemy of freedom, Vladimir Ilyich Lenin.  The worst that can be hinted is that Keynes may himself have been one of those enemies of freedom whose skill in wielding political power allow them to get ahead in a system where political power controls everything (p. 166, 277).  For White, following Hayek, The Road to Serfdom is a veritable sheet of ice, a slippery slope that can easily sweep the unwitting traveler off his feet and land him in servitude.   Luckily England pulled back from the edge in time, but other countries were not so fortunate.  India’s experience with central planning is presented as an object lesson to all others who might be so tempted; Germany’s miraculous postwar recovery is the counterexample on the other side.

The book recounts, as its subtitle announces, The Great Policy Debates and Experiments of the Last Hundred Years.  They are listed in the first sentence of the Introduction: 

“the adoption of central banking in the United States and elsewhere; command economies during the First World War; communist central planning in the Soviet Union, Eastern Europe, and China; fascism in Mussolini’s Italy; National Socialism in Hitler’s Germany; the New Deal in Roosevelt’s United States; the Bretton Woods international monetary system and the adoption of Keynesian macroeconomic policies after the Second World War; major nationalizations in postwar Great Britain; the reemergence of free-market principles in postwar Germany; Soviet-style Five-Year Plans in India; the final abandonment of gold in favor of a system of fluctuating exchange rates among unanchored government fiat monies; regulation and deregulation and reregulation around the globe; the collapse and repudiation of communism in Russia and Eastern Europe; market-led growth policies in the East Asian “tigers’ and then in China and India; “neoliberal” policies promoting the globalization of economic activities.”


Let it be stipulated that the book covers a lot of territory, and also that it is rip-roaring read.   I learned, for example, that according to biographer Harrod, Keynes’ “recipe for the young economist was to know his Marshall thoroughly and read his Times every day carefully.”  If Keynes were alive today, I’m sure he’d agree with me that is the Financial Times you want to read every day carefully.

So I had fun reading the book, but let me now turn to a bit of criticism. 

My main concern is with the way essentially every one of the debates and experiments is read through the very same constricting lens.   So far as I can see, all are viewed as variations on the long-ago Socialist Calculation Debate between Oscar Lange and Ludwig von Mises.   Can a centrally planned economy even work, much less outperform a free market economy?  According to White, Mises was right and Lange was wrong, but unfortunately the matter did not end there, but rather has been playing out on the world stage ever since. 

You might think I would be more sympathetic to White’s way of framing the policy debates of the 20th century, since my own assessment of the Walrasian turn in economics is probably even more negative than White’s.  He singles out Lange as the origin of the tendency.   In my own research, I have put the spotlight instead on Jacob Marschak, but leave that aside.  The important point is that the Walrasian turn imagined that the economy could be envisioned as a set of simultaneous equations, and the market-clearing set of relative prices as the solution to these equations.  This vision captivated postwar economics, monetarists and Keynesians alike (Friedman and Tobin), and today new classicals and new Keynesians alike as well. 

White doesn’t like it for Hayekian reasons, having to do with information and time.  As for me, I don’t like it for Frank Hahn reasons—it has no place in it for money.  But either way, the important historical fact is that this way of thinking about economics rose to become dominant, pushing White’s favored Austrian tradition into the background, and also my own favored Money View tradition.

When I agreed to discuss this book, I imagined that we might have our own clash of ideas on the subject of money, where Larry is an advocate of free banking, including competitive note issue.  I imagined I would ask him whether he views the shadow banking system as an example of competitive note issue!  Unfortunately he doesn’t say very much about money in the book.  There are only two money chapters, one on Bretton Woods (Keynes) and one on postwar inflation (Milton Friedman).   Nevertheless, it is pretty clear that he views central banking through the same lens as everything else—it is just another example of government stepping in to do what free markets do better, in this case replacing the bankers’ clearinghouses that predated modern central banks.  

I beg to differ.  I align myself with Bagehot, who famously stated that “Money will not manage itself, and Lombard Street has a great deal of money to manage”.  More generally, I align myself with the larger tradition of British central banking thought of which Bagehot was a part, including Ralph Hawtrey, Charles Goodhart, and I would even say John Maynard Keynes.   Like all central bankers, Keynes was trying to find ways to keep an inherently unstable system from blowing apart, not just domestically but also internationally; the international role of the pound was in decline throughout Keynes’ life, but very much present as an intellectual context for his thinking and writing.  This is a very different frame from White, but also, I hasten to add, very different from Krugman.

Krugman serves White as a kind of stalking horse, probably in hope that Krugman will attack the book and so sell more copies!  But for my purposes Krugman is interesting for a different reason, as a concrete example of how different American Keynesianism was from the economics of Keynes.  The Keynesian economics that White explains in Chapter 5 is more the economics of Krugman than it is the economics of Keynes.  White traces it, correctly, back to Samuelson and even farther to Alvin Hansen, but he sees Hansen as nothing more than a popularizer of Keynes.  That’s the standard view, but as someone who has written a biography of Hansen, I have to take issue with this account. 

Maybe I make things worse for Hansen by saying so, but I must insist that Hansen be understood fundamentally as an American institutionalist, very much akin to those who made Roosevelt’s New Deal.  For White that makes things worse because he sees the American institutionalists—Ely, Commons, et al—as successors to the German historical school, the Marx-influenced “socialists of the chair” who supported Hitler and fascism.  Indeed, for White as for Hayek, the important thing about Hitler’s national socialism is that it was socialism; behind Hitler (and Mussolini too) is Lenin.  So for him the American institutionalists are, like the British Fabian society, tainted by the intellectual company they keep. 

I beg to differ.  The American institutionalists were just as much rejecting Marx and the classical economics tradition as they were Marshall and the neoclassical tradition.  For better or worse, they saw these theories as products of class-ridden tired old Europe, not applicable to the New World.  For them government was not the agent of the oppressive king but rather the collectivity of town fathers gathering together to solve common problems.   Europeans—including Keynes and Hayek equally—typically found it difficult to understand what these Americans were up to, and also tended to treat them as intellectual inferiors.  But the Americans were up to something, and it wasn’t fascism or socialism; it was democratic self-government.

I have already indicated that I trace one side of my adoptive intellectual ancestry to the tradition of British central banking.  I trace the other side to the American institutionalists.  In both respects, I am coming from a different place than Larry, so I expect we will have a bit of “clash of ideas” in the Q&A.  But I submit to you that what separates us is more obscured than illuminated by viewing subsequent debate through the narrow lens of the socialist calculation debate, much less the emotionally charged lens of enemies versus defenders of freedom.  He and I, along with pretty much every other economist I have ever met, are all defenders of freedom, each in our own way.